RE QU HAIPING

HCB 1051/2023

[2023] HKCFI 2357

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 1051 OF 2023

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J U D G M E N T

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A.  INTRODUCTION

1.  The petition before the court, presented on 27^th February 2023 (“the Petition”), is based on a judgment debt of US$9,279,400 (together with interest and costs).

2.  The relevant chronology is as follows. On 4^th January 2023, Master Alexander Tang granted summary judgment in favour of the Petitioner against Wintac (Hong Kong) Limited as 1^st Defendant and the Debtor as 2^nd Defendant (together “the Defendants”) for US$9,279,400, together with interest and costs (“the Master’s Judgment”) in HCA 667/2022 (“the High Court Action”).

3.  On 17^th January 2023, the Defendants filed a Notice of Appeal against the Master’s Judgment.

4.  On 3^rd February 2023, the Petitioner served a statutory demand (“the Statutory Demand”) on the Debtor, requiring it to pay the amounts then due under the Master’s Judgment as at 3^rd February 2023, totaling US$9,341,704.18 and HK$392,618.56 (together “the Debt”), within 21 days.

5.  The Debtor did not comply with the Statutory Demand. The Petitioner presented the Petition on 27^th February 2023.

6.  On 10^th March 2023, Master Tang granted an interim stay of execution of the Master’s Judgment conditional upon the Defendants paying HK$24m into court within 21 days. The Defendants failed to comply with the condition without any explanation or attempt to seek an extension of time.

7.  On 30^th May 2023, Master Keith Lam granted a stay of execution of the Master’s Judgment pending determination of the Defendants’ appeal against the Judgment.

8.  By a written decision of 4^th July 2023 ([2023] HKCFI 1711), DHCJ MK Liu dismissed the Defendants’ appeal (“the CFI Decision”).

9.  On 14^th July 2023, the Defendants filed a notice of appeal against the CFI Decision.

10.  On 7^th August 2023, DHCJ MK Liu dismissed the Defendants’ application for leave to appeal against the CFI Decision and for a stay of execution pending appeal.

B.  THE GROUNDS OF OPPOSITION

11.  In the Debtor’s affirmation filed on 11^th April 2023 (“Qu 1^st”), two grounds of opposition to the Petition were raised.

11.1  The Debtor’s primary position was that the Petitioner sued in the High Court Action as a nominee of one Wu Xiaobing (“Wu”); one Wu Wei, a brother of Wu and another nominee of his, was liable to return to the Debtor certain shares of a company which indirectly held valuable land in Shenzhen; the Debtor therefore had a cross-claim which exceeded the amount of the Debt.

11.2  The Debtor’s fallback position was that there should be a stay of the Petition pending resolution of the Defendants’ then appeal against the Master’s Judgment; it was said that there were strong grounds of appeal.

12.  In the Debtor’s skeleton argument, numerous additional grounds of opposition to the Petition were raised, which can be distilled into the following.

12.1  The Debtor’s principal argument is that he has a bona fide appeal against CFI Decision, so that the Debt is disputed.

12.2  The Debtor has a counterclaim, set-off or cross demand against the Petitioner exceeding the amount of the Debt.

12.3  The Debtor is able to pay the Debt.

12.4  The Petitioner is effectively a secured creditor.

B1.  Whether bona fide dispute over Debt

13.  The approach to be adopted where a debtor challenges a debt was addressed in Re Tam Mei Kam, unreported, CACV 87/2012, 8^th May 2013, at [22] to [27] (Yuen JA). A judgment for a sum of money is prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum. The judgment debtor may seek to rebut such prima facie evidence. If the judgment debtor fails to satisfy the court that he has a reasonable prospect of succeeding in his appeal against the judgment, he will have failed to show that he has a viable or bona fide appeal, and will have failed to rebut the prima facie evidence of indebtedness.

14.  In the High Court Action, the Petitioner claimed against the Defendants for outstanding principal and interest owed under two loan agreements (“the Loan Agreements”). The relevant facts were set out in paragraphs 4 to 7 of the CFI Decision. For present purposes, it suffices to refer to the following.

14.1  Under the Loan Agreements, the Debtor was named as one of the borrowers.

14.2  The Debtor’s case was that he was not liable to repay the Petitioner by reason of representations made by Wu that in consideration for the transfer of shares in the Debtor’s companies (which held mainland properties), the liabilities of (inter alios) the Debtor would be released.

14.3  On or around 17^th June 2020, an equity transfer agreement (“the ETA”) was entered into, pursuant to which shares (“the Shares”) in two companies owned by the Debtor, Shenzhen Yihua Investment Development Limited (“Yihua”) and Window of Trade International Limited (“WTIL”), which companies directly or indirectly owned valuable properties in mainland PRC, were to be transferred to companies said to be nominees of Wu. Wu was not a party to the ETA; nor was the Petitioner.

14.4  However, after the transfer, Wu’s nominees breached their contractual obligations under the ETA. The Debtor and his companies commenced arbitration proceedings against Wu’s nominees in the mainland. The arbitral tribunal ruled that Wu’s nominees were liable to return, inter alia, the shares in WTIL (“the WTIL Shares”). However, the WTIL Shares have not been returned. The Debtor has commenced proceedings in the BVI to enforce the arbitral award for the return of the Shares (“the BVI Proceedings”).

15.  The Debtor says that in effect, Wu’s camp agreed to release the Debtor’s liability under the Loan Agreements in return for the Shares being transferred to Wu’s camp. Whilst the Debtor procured the transfer of the Shares, Wu’s camp failed to pay for the Shares, to release the Debtor’s liability, or to return the Shares; it would therefore be unjust to bankrupt the Debtor at this stage.

16.  At the hearing before me, counsel for the Debtor, Mr Patrick Chong (appearing with Mr Edward Ng) initially referred to the potential defence alluded to by Master Keith Lam, namely, that the parties might have shared a common understanding that the Loan Agreements would not be enforced pending the performance of the ETA by Wu’s camp. This would explain why (amongst other things) the Petitioner was not party to the ETA.

17.  However, Mr Chong subsequently clarified that the Debtor’s defence was that it was represented to him that upon the signing of the ETA, the Debtor would be immediately released from liability under the Loan Agreements. The representation was relied on in legal terms as either an agreement to vary the Loan Agreements, or as giving rise to various forms of estoppel. Mr Chong also described the ETA as implementing the representations or the variation agreement.

18.  This stance means that, as pointed out by Mr Joseph Wong, counsel for the Petitioner, the Debtor is not, after all, seeking to argue that there was some kind of temporary release or suspension of the Debtor’s liabilities pending performance of the ETA. Indeed, the Debtor had not sought to argue this before Master Tang or DHCJ MK Liu either.

19.  As DHCJ MK Liu observed (CFI Decision [23]), the Debtor’s pleaded defence undermines the claim that the Debtor was to be immediately released from liability under the Loan Agreements, since it envisaged that the proceeds of the sale of the Shares pursuant to the ETA would be used to repay the loans under the Loan Agreements – in other words, the Loan Agreements were not to be automatically discharged upon signing of the ETA.

20.  Furthermore, cl.5.2 of the ETA (which was said to implement the representations or the variation agreement) itself effectively provided that after the transfer of the Shares, the purchasers would provide funds to enable repayment of loans under (inter alia) the Loan Agreements. Footnote 5 to Appendix III-A and footnote 4 to Appendix III-B of the ETA referred to the release of the Debtor’s debt guarantee obligations within a number of months after completion of the transfer of shares under the ETA. These clauses are therefore consistent with the obligations under the Loan Agreements remaining in existence despite the ETA.

21.  Mr Chong submitted that after the share transfer, the debtors under the Loan Agreements would be companies associated with Wu’s camp, so that it was quite wrong of them to refuse to provide funds to repay the loans under the Loan Agreements, as they were obliged to do under the ETA, and to look to the Debtor instead. It seems to me that whilst this might form the basis of a complaint of breach of the ETA, it does not advance the Debtor’s case that there was a release of his obligations under the Loan Agreements upon the signing of the ETA.

22.  Mr Chong submitted that DHCJ MK Liu was wrong for three reasons.

23.  First, it is said that DHCJ MK Liu overlooked the fact that the sale proceeds for the Shares had not been paid, so that the condition for the repayment of the loans under the Loan Agreements had not been triggered. However, the point made in the CFI Decision was that the Debtor’s obligations under the Loan Agreements survived the execution of the ETA and were not discharged.

24.  Second, it is said that DHCJ MK Liu misconstrued the Defence, in that the proceeds of sale of the Shares were not to be paid to the Debtor’s camp for discharge of the loans, but were to be used by Wu’s camp for such discharge as a matter of their internal intra-group transfers (Wu’s camp having acquired by virtue of the share transfer the companies which owed the loans). It was therefore the Debtor’s pleaded case that the Loan Agreements would be discharged without the Debtor having to take steps to procure repayment. However, even on that basis, it remains the case that the pleading envisaged that further steps would be required before the Loan Agreements would be discharged (see Defence paragraph 12.2) – in other words, there would be no automatic discharge of liability under the Loan Agreements. Furthermore, this is also consistent with the clauses of the ETA relied on by the Debtor.

25.  Third, it is said that DHCJ MK Liu wrongly rejected the defence of estoppel by convention in that he relied on the same reasons given for rejecting the defence based on representation. It is said that the Debtor had pleaded a separate and distinct defence that there was a common understanding that the loans under the Loan Agreements formed part of the consideration under the ETA, and that these were to be assumed and repaid by the Wu’s camp. However, again, even on such a plea, it would still be the case that the Loan Agreements had to be repaid; it was not the case that liability thereunder was extinguished upon the execution of the ETA. Again, there might be a complaint of breach of the ETA, but this does not amount to a release of the Debtor’s obligations under the Loan Agreement.

26.  Apart from these matters, the Debtor says that DHCJ MK Liu misinterpreted Kaefer AG v Winfield Marine Services Co Ltd [2022] HKCA 807 as having laid down a general principle that when a defendant has filed a defence, he cannot rely on an unpleaded defence to resist an application for summary judgment. This is a red herring, since DHCJ MK Liu held that in any event, the various unpleaded defences relied upon were not arguable the same reasons that the defence based on representation was not arguable.

27.  The Debtor says that the statement of claim was defective so that summary judgment should not have been entered. It is said that the due dates for repayment of loans under the Loan Agreements are at large and have not been pleaded. This has not been raised as a ground of appeal in the Debtor’s notice of appeal and I need not address it further.

28.  The Debtor also says that the Petitioner relied on manifestly false evidence in the application for summary judgment. This point was addressed in the Decision at [36] to [37]. DHCJ MK Liu observed that the Petitioner had shown a prima facie case on the undisputed facts, to which the Debtor had been unable to raise a defence. The falsity or otherwise of certain parts of the Petitioner’s evidence therefore could not deprive the Petitioner of a judgment.

29.  In the circumstances, I do not agree that the Debtor has shown a viable or bona fide appeal against the Decision.

B2.  Whether Debtor has cross-claim exceeding amount of Debt

30.  The Debtor says that his claim in the BVI Proceedings for the return of the WTIL Shares constitutes a valid cross-claim.

31.  The Petitioner points out the Debtor’s claim is at most a claim in specie, so that the claims are not commensurable: Eberle’s Hotels and Restaurant Company, Limited v E Jonas & Brothers (1887) 18 QBD 459; Derham on the Law of Set-Off, 4^th ed., at paragraph 9.01; Muir Hunter on Personal Insolvency, March 2020, paragraph 3-2092.

32.  Mr Chong did not dispute the requirement of commensurability. He submitted that the Debtor’s claim would likely be frustrated or rendered impossible as it would not be surprising for the Petitioner or the Petitioner’s camp to transfer away the WTIL Shares, at which point it will then be open to the Debtor pursue a common law action in damages.

33.  It will be apparent that this does not overcome the objection as the Debtor’s immediate claim does not sound in money. As Mr Wong has pointed out, the claim in the BVI Proceedings is for the enforcement of the arbitral award, and there is no claim for damages in lieu.

34.  Furthermore, there is no mutuality between the parties to the claims. Where the debtor asserts a counterclaim, set-off or cross demand that is said to equal or exceed the amount of the debt claimed in the statutory demand, the demands must be between the same parties and in the same interest. See Wong Wai Lin Lana v Heung Wah Wing [2001] 3 HKC 649 at 653D to 654F; Re The Sun’s Group Ltd & Another [2004] 3 HKLRD 65 at [40] to [55].

35.  The Debtor’s case is that both the Petitioner (which claims the Debt) and Wu Wei (who would be liable under the cross-claim in the BVI) are nominees of Wu. However, this does not satisfy the requirement for mutuality: the Petitioner is not the party liable to return the WTIL Shares to the Debtor. As Mr Wong points out, even if Wu Wei is held liable in the BVI Proceedings to return the WTIL Shares to the Debtor, the Debtor will still be liable to pay the Debt to the Petitioner.

36.  In any event, the valuation of the properties indirectly owned by WTIL which has been put forward by the Debtor as part of the evidence of the value of the WTIL Shares fails to take into account the fact that the properties have been mortgaged. The properties of Yihua have similarly been mortgaged. Clause 3.2 of the ETA states that the net asset value of Yihua was zero, and the net asset value of Kong Shum (SZ) (which was held by WTIL) was only RMB 14,300,000. The Debtor therefore fails to demonstrate that the value of the Shares would be equal to or exceed the Debt.

37.  I therefore do not accept that the Debtor has a valid cross-claim against the Petitioner which equals or exceeds the amount of the Debt.

B3.  Whether Debtor able to pay the Debt

38.  The Debtor says that he is clearly solvent, and that the only reason he cannot pay is a direct result of the wrongful conduct of Wu’s camp in failing to comply with the arbitral award, thereby preventing the Defendant from realising the value of the WTIL Shares.

39.  Mr Wong submits that this assertion should not be accepted. When Master Tang ordered the payment into court of HK$24m as a condition the grant of the interim stay of execution of the Master’s Judgment, it was not suggested that the Debtor was unable to meet this condition by reason of the Petitioner’s conduct. Furthermore, when the Debtor applied for a stay of execution of the Decision pending appeal on the grounds that he was unable to pay by reason of the wrongful conduct of Wu’s camp, DHCJ MK Liu observed that the Debtor had not produced any evidence to support this claim. This remains the case.

40.  In the circumstances, I do not accept the Debtor’s assertion.

B4.  Whether the Petitioner is a secured creditor

41.  Mr Chong submitted that the Petitioner was effectively a secured creditor as the Petitioner was withholding the WTIL Shares.[1]

42.  However, the WTIL Shares are not held by the Petitioner. The submission raises the issue of mutuality which I have addressed above.

C.  DISPOSITION

43.  I therefore make a bankruptcy order against the Debtor.

44.  I further make a costs order nisi that the costs of and occasioned by the Petition, including any costs reserved, should be paid to the Petitioner and Official Receiver out of the Debtor’s estate, to be taxed if not agreed.